One of the most important benefits of getting a divorce is the ability to separate your finances from your spouse’s. Once your split is finalized, the final settlement or decree will clearly explain how your assets and debts should be separated. This allows you to move on with your life without your spouse’s financial decisions dragging you down.
However, in certain situations, your spouse’s actions can still affect you even after you’ve filed for or finalized your divorce. One of those situations is when they file for bankruptcy. If you have not taken appropriate precautions, an ex who declares bankruptcy can leave you fully responsible for their debts. Here’s what you need to know about divorces, bankruptcy, and shared debts.
California Community Property Laws, Divorce, and Actually Separating Your Assets and Debts
Under California law, assets and debts a married couple acquire are generally considered community property. Both spouses are assumed to have equal ownership of and responsibility for these assets and liabilities unless a prenuptial or postnuptial agreement indicates otherwise. During a divorce, any community property is divided equally between the partners in the settlement or decree.
Until divorces are final, though, all property acquired before the date of filing is still considered community property. Only property or debts acquired after the filing date are considered separate, and that separation is contingent on issuing the decree. As such, your spouse declaring bankruptcy during your split is likely to significantly impact your finances.
Even finalizing your split does not always ensure your finances are fully separated. The decree or settlement contract does not automatically cause any changes in the real world. Instead, these documents must be presented to banks, lenders, investment companies, and creditors, who should appropriately divide the property or debts.
For example, if you’re taking full ownership of your home, you must notify the title company and send a copy of the divorce decree, so they know they must remove your ex’s name from the title. Until all accounts are fully separated like this, your ex’s bankruptcy could still impact you.
What to Expect If Your Spouse Is Filing for Bankruptcy During Divorce
Until your separation is final, you are still legally married. This may seem obvious, but understanding this is critical if you believe your partner will file bankruptcy during your split. It means that as long as you are still legally married, you are likely liable for any debts they incurred during the marriage, whether or not you were aware of them. This is known as “joint and several liability.”
For example, many people discover their spouses have a shopping addiction or gambling problem only when they file for divorce and massive credit card bills are revealed. Unfortunately, under California’s community property laws, half this debt is automatically considered the other spouse’s responsibility.
This is bad enough, but you may be able to resolve the issue by settling the matter out of court and demanding your spouse take full responsibility for the debt. If they agree, they will take full responsibility for each monthly payment. In this case, creditors would not normally contact you to pay anything on the debt.
This changes if your spouse files for bankruptcy before your split is final. Under the principle of joint and several liability, creditors can hold you responsible for 100% of the debt they can no longer pay if your spouse is bankrupt. Therefore, if one partner files for bankruptcy during a divorce, the other person could be forced to do the same.
So Your Ex Is Filing for Bankruptcy After Your Divorce
Finding out your ex is going bankrupt after your divorce is a much better situation. Having the decree in hand gives you more options. If you are still listed as a joint obligor on your ex’s debts, their creditors may still contact you. However, if your decree states that your spouse is fully responsible for those debts, you may be able to get help from the family court system.
Someone who files a Chapter 7 bankruptcy can be ordered by a family court judge to pay debts they are attempting to discharge through bankruptcy if those debts would otherwise fall on their ex-spouse. Similarly, if your ex files for Chapter 13 bankruptcy, you may be able to use your divorce decree to ensure creditors don’t come after you for their debts. However, this is a complex process, and it’s better to avoid it entirely by preparing your finances in advance.
Protecting Your Finances During and After Your Divorce
Protecting your finances from your spouse’s bankruptcy is possible, but you must be proactive. If you’re concerned that they may harm your finances, the following tactics can protect you from the worst financial impacts.
- Talk to your spouse. During your divorce, it’s worthwhile to communicate with your partner regarding their financial situation so you know whether bankruptcy is on the table. If it is, communicate with them about how it may harm you, too. You may be able to convince them to delay filing until the split is finalized.
- Remove your ex from accounts. Remove your spouse or yourself from any joint accounts as soon as your divorce is final. The sooner your names are no longer connected on debts or assets, the less likely their bankruptcy will impact you.
- Check your credit report. If you are listed as a joint obligor on any debts your spouse owes, it should appear on your credit report. Discuss how to resolve these issues with your attorney.
Bankruptcy can leave you responsible for your spouse’s debts. However, a skilled divorce attorney can help you protect your finances during and after your split. At Kaspar & Lugay, LLP, we have decades of experience protecting our clients’ assets from their spouse’s financial mismanagement during the divorce. Learn more about how we can assist you by scheduling your consultation today.